I am grateful—I think that hon. Members will understand how grateful I am now—for the opportunity to initiate this debate. As I stand here, I am reminded of the often told after-dinner joke about the hon. Member who dreamt that he was delivering a speech to the House and woke up to discover that he was.
I should declare my interest in the subject, as the treasurer of the all-party Scotch whisky group; I have a still greater interest in the debate as the Member of Parliament for Kilmarnock and Loudoun. In 1820, John Walker opened a shop in Kilmarnock, starting a wine and spirits business that laid the foundations for the highly successful brand that bears his name: Johnnie Walker—the best selling blended whisky in the world. The business grew throughout the 19th century, until, in 1909, Tom Browne drew the striding man. Although recently, for marketing reasons, he has changed direction, the Johnnie Walker striding man has bestrode the world since then as the symbol of a truly great global industry.
By 1920, Johnnie Walker was sold in more than 120 countries. In these days of globalisation, what commodity other than Scotch whisky can claim to be in every bar or cafe and in almost every hotel world wide? All of that has been has been achieved by people from a small country perched on the north-west shoulder of Europe, with a population of about 5 million people.
In 1998, the Fraser of Allander Institute estimated that a total of £3.5 billion of Scottish output was generated annually by the Scotch whisky industry. Based on 1997 data, the Scotch whisky industry directly employs 12.000 people in Scotland and supports another 28,500 in the wider community. The fact is that 10.4 per cent. of Scottish agricultural jobs and 4 per cent. of all manufacturing jobs depend on Scotch whisky, and that 5 per cent. of the total Scottish work force—or one job in every 54 in Scotland—depends on the whisky industry. Across the United Kingdom, a total of 60,000 people are dependent on the whisky industry. Moreover, the whisky industry is a Government-friendly one, as about £1 billion in taxes is contributed each year by it to the Exchequer.
In my own constituency of Kilmarnock and Loudoun, the United Distillers and Vintners packaging plant, in Hill Street, Kilmarnock, and the distribution centre, at Hurlford, provide employment to more than 620 people. When I visited the Kilmarnock plant yesterday—with my colleague Margaret Jamieson, who is the Member of the Scottish Parliament representing Kilmarnock and Loudoun—we saw premium Scotch whisky being bottled in bottles of every shape and size, for every corner of the globe. The Kilmarnock plant—those 620 people—will produce 7 million cases of premium Scotch whisky this year alone.
All that has been achieved and sustained despite severe economic pressure and major recent adverse circumstances, such as the abolition of duty free sales for internal European Union traveland the large reduction in exports to Asia, in 1998, following the Asian slump. Although there has been some recovery—in 1999— in Asia, there has been a corresponding sharp decrease in export volume to Latin America. Other adverse circumstances include structural discrimination in the tax system and the application of trade barriers in many global markets, including across the European Union.
One of the few compensations that the industry enjoys is European Union export refunds for cereals, but that is now clearly under threat. The export rebate or refund schemes operated by the EU are payable on basic agricultural products such as eggs, rice, milk, sugar and cereals when they are contained in processed products such as whisky and beer, chemicals and pharmaceuticals, and chocolates and biscuits.
The purpose of the refunds is to provide compensation on non-EU sales for the higher cost of using EU-sourced raw materials that is a consequence of the price support mechanism under the common agricultural policy. Although total exports of Scotch whisky represent about £2 billion per annum, 60 per cent. of that total is exported beyond the European Union and attracts the potential of that refund. For the Scotch whisky industry, refunds are essential to assist companies to maintain competitiveness in their critical non-European Union markets, where they compete against directly comparable products such as American whiskey and pale Japanese imitations.
The importance of the assistance was acknowledged at the time of the UK and Irish accession to the EEC in 1972, when it was recognised that it was necessary to ensure supplies of European Community raw materials to the spirits industry at a fair and reasonable price.
That recognition was reflected in protocol 19 of the UK and Irish accession treaties, which requires the Council to decide the necessary measurements to facilitate
the use of community cereals in the manufacture of spirituous beverages obtained from cereals, and in particular of whisky, exported to third countries.
That protocol, which also serves the interests of our farmers, is still relevant today and provides for this country and for the Irish a unique basis for the full maintenance of export refunds for the spirits industry. Importantly, it provides a unique basis for refunds on any of the EU cereals used in whisky production, which includes maize and wheat as well as barley.
Over many years, the European Community has attempted to remove or reduce distillers' rights to obtain refunds. The current attack on the distillers' rights has its roots in the settlement of the Uruguay round of the world trade talks in 1995. There, the EU agreed to expenditure ceilings for export refunds. That agreement, coupled with decisions on the EU budget taken at the Berlin summit in March, generated pressures on the budgeted provision for processed products export refunds late in 1999. The European Commission estimated that demand for refunds was likely to outstrip the agreed budget. For the months of November and December 1999, the Commission proposed flat-rate cuts of 4.5 per cent. to the non-annexe 1 refund rates for dairy products, cereals and sugar.
The UK and other member states criticised that decision. However, despite the lack of support from a single member state, the Commission promulgated and applied the regulations that imposed the flat-rate cut across the non-annexe 1 refund regime.
A flat-rate cut was only a short-term strategy. In November, the Commission issued a communication to the Council of Agriculture Ministers on the longer-term strategy. It controversially recommended abolishing or reducing refunds for some products, such as Scotch whisky, without any change in the refunds available to other sectors. The Commission has once again specifically targeted spirits for reduction.
The Agriculture Council is due to consider the proposals in March. That is why the debate is timeous. If the paper is agreed, the detailed rate of reduction in the rebates will probably be set thereafter by working groups. Each member state has a representative in each working group, but decisions are taken on the basis of the qualified majority. If the paper is agreed, it may become impossible to prevent the loss of cereal refunds.
It is important that, in March, the Government do not nod through a general, undetailed proposal without knowing the potential detailed impact on distillers. While the flat-rate 4.5 per cent. across-the-board reduction will probably be removed if the working group follows the proposal set out in the Commission's November communication, cereal refunds for whisky may be singled out for cuts that do not apply to other sectors. That is why the proposals must be challenged at the March Agriculture Council. Any reductions now could be the thin end of the wedge for the industry.
Cereal costs are a significant element of the cost of production of Scotch whisky. The industry estimates that for new make grain whisky, cereal raw material costs, after the export refund is paid, are about 60 to 70 per cent. of primary production costs: for malt whisky, they are about 50 to 55 per cent.
The impact of any reduction in refunds is illustrated by the differences between EU and world maize prices. In April 1999, EU prices were 47 per cent. above world prices, and the premium in November 1999 was 58 per cent. World prices fell by 10 per cent. over the period. However, the net EU price for Scottish distillers, even with their export refunds, rose by 7.2 per cent. A broadly similar picture applies to wheat and barley.
Scotch whisky will suffer an increasing competitive disadvantage if, as the Commission proposes, spirit refunds are reduced further or eliminated altogether, unless efforts are renewed to reform the CAP and reduce EU cereal prices to world levels; or there is a full and unfettered access to world supplies; or an alternative form of compensation is devised for the gap between EU and world raw material prices.
It is unfair and anti-economic to expect the industry to carry the can for the failure of the Community to agree adequate reforms to the CAP in Agenda 2000, which would have reduced the need for export refunds by aligning Community prices more closely with world market prices.
The industry also questions the robustness of the Commission's economic analysis, the choice of product sectors for refund reduction or elimination and the principle of targeting itself.
Reportedly, there is a compensatory measure. The package of measures proposed by the Commission includes a proposal for more flexible increased access to inward processing relief, a relief that enables manufacturers to import basic commodities tariff free for incorporation and re-export in processed form. Distillers with longer memories recall that 1PR and applications made under it were disagreeably complicated and bureaucratic.
The view of the industry is that IPR does not even begin to represent a solution if the process is not made smooth and easy for processors, and frankly, that is highly unlikely.
IPR as an alternative compensatory mechanism has, however, the significant disadvantage that it will drive manufacturers outside the Community where they can obtain their raw materials at world market prices with obvious consequences for jobs and for the market in agricultural commodities within the EU. That cannot be a long-term solution. The only real solution is to dismantle EU intervention pricing and to allow free market pricing in raw materials such as cereals within the EU, but that can be done only when there is reform of the CAP price structure.
In the meantime, the Commission's proposal to target spirits appears to be contrary to the UK's accession treaty, and discriminatory. As the issue is expected to come before the March Agricultural Council this debate is timely.
I merely ask my hon. Friend to assure the House—and the industry, which will pay attention to this debate—that the strongest possible defence of the industry's vital contribution to the economy will be mounted.
I thank my hon. Friend the Member for Kilmarnock and Loudoun (Mr. Browne) and the Minister for allowing me to participate in the debate. There are two large whisky companies in my constituency—Allied Distillers and J&B. Sadly, J&B is closing down as a result of the merger between Grand Metropolitan and Guinness. There has been a loyal and committed work force there for 30 years, however, and record production is still being hammered out week in, week out, and will continue to be until the closure in a few months' time.
The industry and its work force are also extremely good for the economy. Allied Distillers has consolidated its position in my constituency and looks forward to a good future in Dumbarton. It is also a good future for the country. As my hon. Friend said, there are sales worth £2 billion. For every job that is created in the whisky industry, another three or four are created outside the industry. Some 50,000 to 60,000 jobs in Scotland are being supported by the whisky industry and every worker in the industry contributes £80,000 to the Treasury as a result of the duty that is paid on the product. So it is a precious industry and I ask the Minister to be vigilant about issues that affect it such as export refunds. It is felt that the Scotch whisky industry is being singled out. It cannot afford to be singled out because of the workers and their commitment to the industry and because of the cash flow that it produces for the Government.
I know that the Government have listened carefully in the past few years. I congratulate them on the duty freezes, but, in the long term, there must be a structure on adequate duty levels. I look forward, along with my colleagues and Ministers, to ensuring that in the long term there is a level playing field for the Scotch whisky industry, and that it goes from strength to strength.
May I begin by congratulating my hon. Friend the Member for Kilmarnock and Loudoun (Mr. Browne) on his good fortune in securing this debate? When I first saw that he had done so, I felt sorry that such an important debate was to take place last thing at night, and that it would have been much better to have a daytime debate. However, I did not realise that my wish would be fulfilled in such exhausting circumstances.
I also congratulate my hon. Friend on his choice of subject. As he proved in his speech, this is an important subject. He said, quite rightly, that it is a timely debate, given what is happening in the European Union Agriculture Council and the fact that this item will be discussed at the March meeting.
The points made by my hon. Friend were pertinent and salient. He demonstrated obvious concern for his constituents as well as knowledge of the industry and its importance to Scotland and the United Kingdom as a whole.
I also appreciate the concern of my hon. Friend the Member for Dumbarton (Mr. McFall), who, understandably, spoke with feeling about the industry in his constituency. Other hon. Friends with an interest in the subject are here, even after the all-night debate. My hon. Friends the Members for Dumfries (Mr. Brown), for Cunninghame, South (Mr. Donohoe), for Hamilton, South (Mr. Tynan) and for Stirling (Mrs. McGuire) are all concerned about the whisky industry and its economic importance.
The debate might seem technical if we talk in terms of export refunds for non-annexe 1 products under the common agricultural policy. It can sound like a minor subject, but what is at stake economically is very important. The whisky industry is important to the economy of Scotland and the United Kingdom. It is also important as a direct employer and in providing related jobs.
The industry is also a very valuable export earner for the United Kingdom as a whole. We are talking about exports worth £2 billion annually, of which about £1.2 billion is exported outside the European Union. Those are all reasons why the Government are determined to achieve the best possible outcome for the industry and our other industries that are affected by export refunds.
In many ways, this is not a new issue in European or agricultural politics. When I was a member of the Agriculture Committee in the European Parliament, we were frequently and understandably lobbied by the Scotch whisky industry and others that benefited from and needed export refunds under the common agricultural policy. What my hon. Friend the Member for Kilmarnock and Loudoun has described this morning is the latest twist in a familiar tale. As he pointed out, the whisky export refund is one of a series of export refunds paid under Community rules to compensate exporters for the higher prices of agricultural raw materials supported under the common agricultural policy.
Other industries also receive such export support—other spirit drinks industries, including gin and vodka, but also, importantly, processed food and drink, confectionery, cakes, biscuits and so on, as well as pharmaceuticals. Many interests need to be taken into account.
My hon. Friend pointed out the reasons for the latest form of pressure on such export refunds. He correctly explained that under World Trade Organisation agreements, the EU is committed and obliged to make progressive reductions. That applies to export refunds both for agricultural raw materials, the annexe 1 products, and for processed agricultural products—the non-annexe 1 products on which the debate has focused.
Specific reductions now need to be found in time for the EU's next budget year, beginning in October. At that time, the budget ceiling for non-annexe 1 products will be 415 million euro; that is almost 200 million euro less than the projected expenditure for the current year. In order to keep this year's expenditure within the budgetary ceiling set by the Berlin European Council in March 1999, since last December a cut of 4.5 per cent. has already been imposed by the Commission on all non-annexe 1 export refunds.
As I am sure my hon. Friend and colleagues are aware, the Council of Ministers was not happy with the Commission's approach. It made clear its view that, in future, any adjustments to export refunds that were necessary to meet WTO and budgetary commitments should be governed by a strategic and targeted approach rather than across-the-board cuts in refunds. The Council pressed for speedy progress of the Commission's communication on that issue in time for Ministers to give it further consideration at the forthcoming Agriculture Council.
The amount of targeting and the number of across-the-board measures remain vexed issues. The problem is not helped by the fact that the Commission's thinking and the full effects of its proposals are not yet clear. My hon. Friend referred to that point. The details of any proposed reductions are not clear. We need a better idea of the detailed impact on distillers. I assure my hon. Friend that we will challenge those proposals at the March Agriculture Council.
The general approach of the Commission's proposed strategy is known. It would be to withdraw eligibility for non-annexe 1 export refunds from a range of products; reduce rates for others; and provide more flexible access to inward processing relief to enable processors to access raw materials at world prices.
The Commission has the competence to act on most of those strategic measures, including the proposal to reduce the export refund on cereal-based spirit drinks—whose main impact would be on the UK in the Scotch whisky industry—although white spirits, such as gin and vodka, and beer would be similarly affected.
The pain of any reductions or eliminations will affect other industries and other countries. For example, in Germany, there is a particular worry about the effect on beer export refunds and on a particular class of yogurt that is exported. In Finland, Denmark, Austria and France, there are a variety of concerns. However, I am well aware of the concern in the whisky industry as to the extent and likely impact of the proposals.
Although it is within the Commission's competence to propose such measures, it is important to remember that it must also meet treaty obligations—one of which is protocol 19 to the UK treaty of accession, as my hon. Friend mentioned. The Government fully agree that the provisions of the protocol must be respected and we shall seek to ensure that any action taken to implement the Commission's approach is compatible with the provisions of protocol 19.
Treaties of accession and protocols to treaties of accession are important. They were introduced to try to cover areas in which particular countries who were joining the European Community, now the European Union, could have certain key interests recognised that would otherwise have been in danger of being overlooked, because they were special to a particular country. Therefore, we are very conscious of the importance that the industry attaches not just to the protocol, but to its importance in the overall treaty of UK accession.
I assure my hon. Friend that discussions have taken place at an official level. My Department has been in close contact with the Scotch Whisky Association and with the sectors of the food and drink industry where the measures would have an impact. Further consultations involving Ministers will take place between now and the March Council. My right hon. Friend the Minister of Agriculture, Fisheries and Food has plans to hold such meetings over the next few weeks.
There are also discussions between Ministers in my Department and the Scottish Parliament. For example, I spoke yesterday with the Scottish Minister for Rural Affairs, Ross Finnie, about these and other matters. Indeed, there are regular meetings between my right hon. Friend the Minister of Agriculture, Fisheries and Food and Ministers in the devolved Administrations. We are fully aware of the importance of keeping in touch on these and other issues.
It is also important—I stress this to my hon. Friend—to get detailed information from the industry. The whisky industry and others need to provide us with all the possible ammunition in terms of fighting this particular European battle. We have a responsibility to consider the effects of the different proposals on all those parts of our industry that are at present entitled to export refunds. Given that we accept that world trade commitments must be honoured and are ultimately an important part of the agonisingly slow common agricultural policy reform process, we need to respect them.
At the same time, however, as UK Ministers we have a responsibility to ensure that our industries are not unfairly treated. To help to do that we need as much detailed information as we can get. In particular, we have asked the whisky industry for detailed analysis that would help us challenge the Commission's view that whisky is insensitive to the rate of refund.
I agree strongly with my hon. Friend's analysis of the real cause of the problem and with his belief that the best long-term solution is fundamentally changing the common agricultural policies and those protectionist aspects that cause our industry such difficulty. The UK is in the vanguard of the reform process. We need to push ahead with our allies—and we do have some allies in that process—to achieve agricultural reform.
I thank my hon. Friend and other colleagues, and I assure the House that the words spoken tonight will be important as a contribution to Government thinking and their defence of this crucial and successful industry.